This blog is all about Legal Advice for Purchase Lease Options. Now, of course, I can’t actually give you legal advice because I’m not a solicitor. But what I can do is educate you around some of the legal advice topics involved with Purchase Lease Option Agreements.
Are PLOs Legal?
Now the first question people ask me is, “Are Options legal?“. Yes, they absolutely are legal. They’ve been used in English law for many years. The law society in Scotland doesn’t like Purchase Lease Options so you can’t do Options there. Instead we do something called an exchange with a delayed completion. It’s similar to an Option, but with an Option, you have the right to buy but not the obligation to.
When you do an Exchange Delay Completion (EDC), you are committing to buy the property. So only do those if you’re definitely going to buy. Make sure you’ve got your finance lined up. There are a few places around the world where PLOs are not accepted. Such as parts of Australia as well as a couple of states in America. But generally, this strategy works everywhere in the world.
Amateur investors come to me and say, “Simon, can I have the legal paperwork for a PLO?”. It’s very important when you do a Purchase Lease Option that you get a solicitor to do the legal paperwork and contract for you. This is going to be a valuable property deal for you. You can get cash flow and potential equity growth from a property without a mortgage, that you don’t own. That means you don’t have to put in a big 25% deposit.
So it’s worth spending a bit of money with a solicitor to get the right kind of Purchase Lease Option Contract. Be aware, many solicitors don’t actually know what a Purchase Lease Option is, let alone know how to put a contract together. An Option Agreement should cost between £600 to £1,000 depending what kind of solicitor is used, to do it.
“It’s very important when you do a Purchase Lease Option that you get a solicitor to do the legal contract for you.”
So it’s worth spending a bit of money with a solicitor to get the right kind of Purchase Lease Option Contracts. This is a slight challenge as many solicitors don’t actually know what a Purchase Lease Option is, let alone know how to put a contract together. If you went to them they’ll either say, “Well I’ve never heard of that, I don’t think you can do it.” Or, if they’re a bit more open minded and say, “Well okay, I don’t know that, but I can do it for you.It’s going to cost you four grand”.
This is because they’ve got to learn how to do it. An Option Agreement should cost anywhere between £600 maybe up to about £1000 depending what kind of solicitor is used, to do it.
Putting Together the Head Of Terms
Major Legal Advice for Purchase Lease Options is to use your solicitor to do the paperwork for you. In order for the solicitors to prepare the paperwork you will need to put together a Heads of Terms for them. HOTs are the details of the deal you have agreed with the owner of the property. It’s so simple, you could literally write it on a piece of paper.
Here is what you need to include on The Heads of Terms:
- Your name and address
- The owners name and address
- The address of the property on which you’re doing the Option
- The agreed purchase price
- The length of the Option term
- The Option fee you’re paying them
- Any monthly options fees to be able to use the property
- Any special conditions.
If you want to change the kitchen in the house for example, it’s much better that you agree that up front. This is rather than trying to do it two years down the line. Where you might not get hold of the owner. Your solicitor can get a power of attorney for you if you want to exercise the Option. They’ll make sure that if you want to have a restriction on Land Registry, you can do that, so the owner can’t refinance or sell the property, because you’ve got the option to control it. So your solicitor takes care of all those things. You don’t need to do it as long as you use the correct solicitors.
It’s also very, very important to make sure the seller has independent, legal representation. We want to make sure they are fully aware of what they’re agreeing to. We’re not trying to trick or con anyone. We want to find someone for whom a Purchase Lease Option is a great solution for. This is whilst also being a great solution for us.
If the seller gets independent advice the solicitor will say, “Look, do you realise you’re signing something here that says that it might be worth £200,000 now, but they can buy at any time in the next five years, and it might be worth substantially more, but you’re only going to get the £200,000 you agreed.”
They’ll then sign and say, “Yes, I understand this.” The reason the owner is willing to do this is because they don’t want the hassle of the property anymore. They want to get away from the liability. They’re happy for you to come in and take it over. You’re happy to take it over because you get cash flow on the property in the meantime. Then you can buy the property in the future, if you want to or you can walk away. Remember, you’ve got the right to buy, but not the obligation to do so.
“Don’t expect the solicitors to talk together and agree the deal. You need to present them with the Heads of Terms that says exactly what the deal is.”
In Summary
So when it comes down to Legal Advice for Purchase Lease Options, there are a couple of things you need to be aware of. First of all, you don’t want to be doing the paperwork yourself. Get a solicitor to do that for you. You need to make sure that your solicitor and the sellers solicitor know what they’re doing and understand Purchase Lease Options. Get a recommendation from other investors who are doing this strategy. This can perhaps be from a local network meeting. Find out who they use.
In order for the solicitors to prepare the paperwork you will need to put together a Heads of Terms for them. This is a basic agreement saying exactly what the deal is. It’s so simple, you could just literally write it on a piece of paper. It’s your name and address; their name and address; The address of the property on which you’re doing the Option; the agreed purchase price; The length of the Option term and The Option fee you’re paying them. You can also add any monthly options fees to be able to use the property and any special conditions too. Don’t expect the solicitors to talk together and agree the deal. You need to present them with the heads of terms that says exactly what the deal is.
Purchase Lease Options is one of my favourite strategies and I think it’s a great strategy to use right now. Be aware, they don’t work in every circumstance. They only really work if the seller doesn’t need the money from the sale now. If they need the money now, then Options are not going to work for them. So only use Options when they are appropriate. But when they do work, when they’re appropriate, they can be an incredibly powerful strategy. They offer a true, genuine, win-win solution for everyone involved.
